Granger Cobb: At Emeritus, Care and Safety Outweigh Profits

Granger Cobb is the president and CEO of Emeritus Senior Living, the largest assisted living provider in the U.S. Cobb told FRONTLINE that although several Emeritus facilities have had accidents involving seniors, the company’s safety record is trending up. He stressed that quality care, not profits, is what fuels Emeritus. “If we can’t adequately care for the resident, we shouldn’t have them. That’s the bottom line,” said Cobb. This is the edited transcript of an interview conducted on Nov. 30, 2012.

[question]Since the early 1990s things have changed dramatically for seniors in America. More and more older Americans are moving into assisted living facilities rather than nursing homes. Why do you think that is?[/question]

It’s completely consumer driven. Assisted living has evolved as another option for seniors that didn’t exist before, where they can live in a more residential environment, surrounded by their own things, and engage with other seniors and socialize and still have all the amenities: the meals and activities and transportation and housekeeping services, maintenance, all of those sorts of support amenities.

So I think that it offers a lot more choice than a skilled nursing environment, certainly is a lot less institutional than a skilled nursing environment, and offers the privacy component.

In skilled nursing, you’ve got a nurse that’s going to pop in every hour or two to check on you or your roommate on the other side of the curtain. In assisted living, that’s your own apartment, and you have that privacy, and you have the dignity that goes along with that.

[question]The assisted living industry grew very rapidly in the 1990s. Tell me about that.[/question]

This all of a sudden was an alternative for seniors that needed some assistance with activities of daily living, or maybe wanted socialization and had been isolated in their own homes and not getting out frequently enough.

I think that seniors, particularly if they’ve lost a spouse and they’re isolated in their home and they’re not getting nutritious meals, they’re popping the frozen burrito into the microwave, all of a sudden there’s this option where they can get the degree of assistance that they need or want and still just have a much more fulfilling life, have much better quality of life.

So it became very popular. Certainly it’s grown pretty dramatically over the course of the last few years. And as I said, the alternatives are some additional care in your own home, which is an option that many people look to, or there is a senior living option that could be independent living, assisted living or memory care.

Then there’s skilled nursing, and [with] skilled nursing there is [a] fairly significant distinction, because then you’re going to a much more institutional, rigid environment.

[question]A number of people, yourself included, have said that by the year 2000 the industry had grown too fast. It had built too many beds and didn’t have enough seniors to move into those facilities. How did the industry adjust?[/question]

The industry went through a hard time. There were a number of companies that went out of business or declared bankruptcy. There was a fair amount of contraction in the industry as a result [of] just that.

Everybody saw this bulge coming down the pipeline of these baby boomers, never mind the fact that that was 25 years out, and they overbuilt. The industry got way too excited about this new product. And there was as much financing as anyone wanted, and there was equity for anyone who wanted to build, and anyone who built anything in a multi-family sector or anywhere else all of a sudden jumped into assisted living.

The industry overbuilt, and we saw occupancies plummet, and I think it took the industry about three or four years to really absorb that excess capacity and get back on its feet again from an overall occupancy standpoint.

[question]Emeritus expanded its footprint very greatly over a span of a decade. In 2002, the company was capable of housing less than 20,000 people. If you fast forward it to 2011, it was capable of housing about 50,000 people. Tell me about that growth.[/question]

It’s never been a goal of ours to be the biggest, but there is a premium on quality assisted living operations because of the demand that’s out there. So as we’ve really focused on being the best and providing the best quality of care and service and customer satisfaction, opportunities have come our way.

And we have the opportunities to acquire. And we’ve primarily acquired. We’ve developed some communities along the way, but mostly we’ve grown through the acquisition of other properties.

[question]Is Emeritus the largest assisted living provider in the U.S.?[/question]

I believe we are the largest assisted living and memory care provider in the U.S., not the largest senior living provider. There are companies out there that have more on the independent living side and CCRC, or continuing care retirement community side. But from just a pure assisted living and memory care, we’re the largest.

[question]In terms of assisted living and memory care beds, Emeritus has more than anybody else in the industry. [/question]

That’s correct.

[question]As the company grew, it took on a lot of debt. In 2002, the company was carrying on about a $125 million of debt. By 2011, that number was somewhere around $2.2 billon. How did you deal with that debt load?[/question]

That debt number is a little bit skewed because of the way GAAP [Generally Accepted Accounting Principles] requires lease accounting to incur.

[question]And tell us what GAAP is.[/question]

Generally Accepted Accounting Principles are the principles that all public companies have to adhere to, and the idea being that that creates a transparency in terms of their financial operations. Unfortunately in our business, because of the complexity of the lease accounting rules and depreciation and amortization, and some of that accelerated and some not, it really kind of obscures the underlying operations.

So typically what we’ve done is very similar to what an individual does when they buy a house. We acquire a community, we put 70 percent debt on the community, and we pay our mortgage payment and away we go.

In some cases we’ll lease a community, in which case maybe a REIT or a Real Estate Investment Trust will actually buy the property, and then we’ll pay a lease payment to them. And again, then we own the operations but we’re paying rent on this property to a REIT.

So those are the two principal ways that we’ve grown. They’re just kind of different methods of financing. And particularly on the lease side, depending on a number of different factors including the length of the lease and certain options and things like that, it may be accounted for differently. But it’s usually accounted for as it looks like debt on our balance sheet. …

[question]… For some companies, taking on a lot of debt means new challenges, new problems, new issues they have to deal with. Was that the case for Emeritus?[/question]

One of the big distinctions with our debt versus many other companies is that it’s secured by our properties. So many companies grow, they take on unsecured debt, and then investment community looks at that and weighs that in terms of a risk profile for that company.

Our debt is secured by the individual properties, so if there is such a thing between better debt and worse debt, we have the better debt is the best way I can explain that. We have very little unsecured debt.

[question]As the CEO, and you were taking on all this debt, was there even a moment that you found it was more difficult to run the company? Or it was harder to provide the services that you wanted to provide to residents? Or any issues like that?[/question]

No. We’ve never been in a position where we felt like our capital structure was too heavy on the debt side. We’ve always felt very comfortable about our revenue stream and our cash flows.

And the beauty about our business, and part of the reason I’m so passionate about it is, if you do a really good job of delivering the care and service and creating high customer satisfaction, you’re going to stay full from an occupancy standpoint. You’re going to be able to charge a fair price for your product, and rest of it just kind of takes care of itself. We have a very reliable revenue stream if we do a good job on delivering on the care component.

[question]So there was never a moment where you had to say, I’d like to hire more caregivers, or I’d like to pay them more, or I’d like to do this, but I can’t do it because I’ve got to service this debt?[/question]

No. We’ve never been in a situation where our debt load was putting us at risk of anything. We’ve grown in terms of our overall operating performance every year I think for the past seven or eight years, and so we’ve never felt any pressure that we need to do something differently.

[question]… Emeritus is a public company. Your stock trades on the New York Stock Exchange. What kind of pressure does that put on you as a CEO?[/question]

I think it necessitates a level of discipline and accountability with respect to all of our systems and procedures and reporting, making sure that we are not only in compliance with state regulations and all of that regulatory piece, but also we have this broader oversight from a financial perspective and reporting perspective, and probably higher visibility to make sure we’re complying with HIPAA [Health Insurance Portability and Accountability Act] issues and SOX [Sarbanes-Oxley Act] issues and all of the other sorts of regulatory issues that are out there for our type of business.

[question]Wall Street’s concerns are very different than those of consumers. When you get on quarterly earning calls and you’re talking to market analysts, you’re talking about occupancy, how many people are your buildings. You’re talking about revenue, how much money those people are bringing in. Your stock price can go up or down depending on those metrics. How does that affect how you run the company?[/question]

… If a community generates high customer satisfaction and high referrals and high recommendations from the community, it is going to be extremely successful from the financial standpoint. That’s the output of doing a good a job in terms of the care delivery.

[question]… How do you balance the demands of Wall Street versus the demands of consumers?[/question]

We’re fortunate in that we are primarily private pay. We are catering to a consumer that generally looks at four or five communities before they make a choice. Again, it comes back to making sure that we are doing a better job than the person down the street, because otherwise they’re going to choose somebody else.

“If you have satisfied customers, you’re going to have higher occupancy. You’re going to be able to charge more for your product. That’s the reality.”

And that has an impact to our investors. That’s what they’re looking at — is your occupancy versus the other guy’s occupancy and your average rate versus the other person’s average rate. Because if you have satisfied customers, you’re going to have higher occupancy. You’re going to be able to charge more for your product. That’s the reality.

So the focus is really back to the quality and customer satisfaction aspect. If we can do that well, we will satisfy Wall Street, and we’ll do well relative to our competitors in the industry, and that’s really our focus.

[question]Let’s talk about a tough situation. The housing bubble in 2008, when it burst, how did that affect your company?[/question]

Our stock price plummeted, because immediately investors — and a few analysts too I have to say — said: “Oh my gosh, … a large number of people sell their home and use the assets to move into assisted living. They’re not going to be able to do it. And so occupancy’s going to plummet and companies are not going to be able to cover debt.” The whole industry saw their stock price, the public company stock price, drop pretty dramatically during that period of time.

What actually occurred, though, over the course of the next year is occupancy had been on an upward trend and it flattened out. It maybe dropped a little bit I think industry wise. We actually maintained a flat trend over that period of time. And all of a sudden, everybody took a deep breath and said: “OK, I guess that the demand is still there. It’s still a need-driven business, and their occupancy growth may have slowed down a little bit, but it didn’t drop.”

We saw gradually that stock prices come back, and I think people have a little more comfort. Now we can kind of point back to that as a positive and say we’re one of the few industries that didn’t go backwards in the recession. We slowed down a little bit in terms of growth, but we didn’t go backwards.

[question]On paper Emeritus has consistently lost money for many years now. I think in 2011, the number was something like $71 million. So these are not small losses, and yet the company’s share price trades pretty well on Wall Street most of time. The company is still in business. …[/question]

We’ve grown, as you’ve said, pretty consistently over the course of the last several years. And as we’ve grown, we’ve acquired a number of properties that we then depreciate. Now GAAP accounting again requires that that depreciation be handled in different ways. For instance, a piece of the price we pay for a community, they have determined, is due to these residents that are in place, and the value that is there because of these residents that are in place.

And since our average length of stay is around two years, they say you’re going to depreciate that component over two years. Very super-accelerated depreciation. And so that shows up as an expense on our P&L [profit and loss report], even though we’re not paying any cash out for that.

So what we’ve tried to do for investors is do some calculations that guide them to what are underlying fundamentals of the operation. If you kind of strip out the depreciation and amortization and those components that tend to be not so intuitive, and if you do that and you focus more on our cash flow and how our cash flow has grown over the last several years, I think that’s what’s driving our stock price and others in the industry. Because we all have the same issue. It’s that accounting component.

[question]Would you say because of the complexity of accounting for this business, that really the key indicator to success or failure is your cash flow on an annual basis?[/question]

Yes.

[question]… So when you’re talking to market analysts and you’re talking to investors, you say: “Look at cash flow. Don’t look at profit or loss”?[/question]

I think they also want to make sure that the cash flow is growing as a result of increased revenues, which comes from occupancy and rate. Everybody, I think, understands from the investment side too that if you want to be an efficient operator, but if you’re an operator that’s growing your cash flow for an extended period of time by reducing expenses and not growing your top line, that’s probably not a good long-term plan to have in place. So it’s two components: It’s the revenue side of things and then the cash flow.

[question]As CEO, what would ideal financial success look like to you? Would you like to post Apple-like profits, or does that even matter in you industry?[/question]

No, I think it’s base hits. It’s just being consistent. We’ve never held ourselves out to be a company that’s going to have some kind of crazy windfall profits. It’s basically just steady. …

[question]Tell us about the growth of the population here.[/question]

The 75-plus demographic is growing by about 400,000 individuals per year, so there’s this increasing demand. And frankly, out 15 years when the baby boomers start hitting, it’s going to grow by a million a year. And so there’s this huge demand that is already here and on the horizon.

It’s going to increase, and I think that what we’re looking at is to be able to service that demand as it continues to grow. So it’s a steady kind of long-term strategy to continue to service that demand.

“We’ve never held ourselves out to be a company that’s going to have some kind of crazy windfall profits.”

I would say there’s one other component that is going to be significant over the next five years, and that’s the change in the health care delivery system that really was a part of health care reform initiated by changes in Medicare reimbursements to hospitals, where they now are penalizing hospitals for readmissions of the same diagnosis.

So hospitals for the first time are very interested in partnering with post-acute care providers such as independent living, assisted living, memory care, home health care, all of those post-acute providers to help keep their patients out of the hospital and to be able to deliver care in whichever setting that resident chooses, but which is a lower cost setting than being in the acute hospital, and actually less traumatic on the resident as well.

So if this all works right, the way it should, it’s a win-win for everyone. Because the seniors will have their care coordinated better than ever before across whatever setting they chose to be in, and the whole system will save money, because they’ll be cared for in an environment that is less costly than going into the acute hospital.

[question]Are you optimistic about future of this business?[/question]

Absolutely. I would say that our two goals are to continue to service that demand of those seniors who are going to be looking for options as they age over the coming years, and also to play a more significant role in that post-acute care space. And figuring out — which we are working on but haven’t quite figured out yet — how to coordinate the care of our residents with the hospitals and the physicians.

We’re going to be moving to electronic medical records and all of these other things to facilitate that. But that’s also an exciting piece of this and I think one of the areas that’s going to provide a lot of opportunity for our business.

[question]… On a facility basis, is there a target amount of revenue that you would like to generate per year? Is there a barometer for financial success or failure, and if you don’t hit that target, you say, hey, we maybe need to let go that facility? Is there a number?[/question]

There is not a number. Our goals that we lay out for our executive directors and regional directors that provide oversight to our communities are pretty simple. It’s [that] we would like them to be able to grow for their year-over-year percent review growth, to exceed their year-over-year percent expense growth. If they can accomplish that, we’re moving in the right direction. …

There are not set margins because every community is different. Large communities and small communities and memory care and assisted living and independent living, they all have different structures and different cost structures, different operation components, they’re in different markets. There can’t be a single margin target or revenue target that we can throw out there and say this is what everyone should do.

[question]On a company-wide basis, if not for the complexities of accounting rules, how much money do you think this company would make on an annual basis? What would your net return be, your net profit, if not for accounting rules?[/question]

We report cash flow from operations, so we kind of try to boil it down. It’s not a perfect measure, but it probably gets close to what kind of the net result is after we’ve paid all of our expenses and debt service and lease payments and all of those sorts of things and made some reinvestments in terms of capital improvements into our properties.

I think this year we’re reporting in the neighborhood of $80 million of cash flow from operations. Now we use another big chunk of that … to reinvest in future growth, so to acquire additional properties, to reinvest into our existing properties and renovate them. And it gets used in a number of ways, but that probably is a close approximation. …

[question]A former Emeritus executive named Susan Rotella testified about how your California facilities were being run a few years ago. She said that directors at these facilities were, quote, “being constantly told to cut labor expenses, cut labor, cut labor, cut labor, especially in a community that wasn’t meeting its bottom-line number.” Why do you think she would say that? What do you think of that assertion?[/question]

I have no idea. We give a lot of latitude to our executive directors to staff the community appropriately for what they feel is necessary to care for the residents. We have guidelines that we give them, tools that we give them to help them determine appropriate staffing levels, but at the end of the day, they make those determinations.

And like I said, we have always trained and coached and guided our executive directors that the way to achieve growth and to improve your bottom line is to make sure you are providing the very best service of anyone else in your competitive market. That really is the way to achieve success in our business.

[question]So her claim that there was an order from Seattle to the California facilities, hey, cut labor by 10 percent across the board, you don’t agree with that.[/question]

That’s ridiculous. I can’t imagine. We can’t sit here in Seattle and know what the need is in a specific community in California in terms of their staffing or anything else. That has to be the reason we put so much focus on leadership development at the regional level and the community level, because this is a local business.

This is not a McDonald’s. This is not a cookie-cutter type of operation. This business is about our local team, our caregivers, dining room employees, housekeepers, the management staff interacting with our residents and families at that local level. That is our business.

We don’t generate any revenue here in Seattle. We absolutely are here as a support function to help them be successful. So we don’t ascribe to a top-down management, start dictating that this is how you do it, because we are not there, we don’t know.

That is a function of the decision-making that goes on at the community in conjunction with their regional team, and their regional team is a multidisciplinary team. They have an operations person, they have a nurse, and they have a sales and marketing person that helps guide them in terms of putting the strategy in place that’s going to make them successful long term.

[question]Health care can be a tough business. We have spoken to people who worked for Emeritus on the ground level. He told us about making $9 or $10 [an hour] now working really tough jobs. Are you paying people enough as caregivers, as medication technicians? Are they getting a fair wage?[/question]

We put a lot of effort into doing annual wage surveys and compensation surveys across the country. So market by market, we go out and do these surveys to make sure we are competitive from a wage standpoint, from a benefit standpoint. We want to be the employer of choice. We want to attract the best talent in each market, and so we bring a lot of focus to that.

I would agree caring for seniors is a demanding job, and you almost have to have a calling for it. You have to have a passion for seniors or it’s going to be a tough position for you long term.

[question]Is one of the ways to achieve success in this business by minimizing labor costs? Is that a way that you can up revenues and keep the company afloat?[/question]

We don’t make widgets, and so one of the things I would liken it to is if you are making a widget and you figure out how to shave a little quality off when nobody notices, you might be the hero.

In our business, you shave any quality off and you’re going to see your reputation go down very quickly, and you’re going to see your bottom line go down very quickly.

It’s just the opposite if we do a good job. We rely on our reputation. The majority of our referrals come from word of mouth from physicians, from professionals in the community that know and are comfortable with the product that we offer, and so we have to focus on making sure that we are doing it better than anyone else. And that’s how we are going to be successful.

[question]… We’ve spoken to some former Emeritus employees. They have said, look, there is a big pressure to fill beds in this company. Occupancy is a key part of this business, and that leads some people on the ground to move in people who really shouldn’t be in assisted living, who aren’t a good fit for an assisted living facility. Do you ever hear about those kinds of concerns?[/question]

We go through a pretty comprehensive evaluation process with every resident that we move into our community, and we go through a process of ensuring that one, it meets within all the regulatory guidelines but two, that that community can properly care for the resident.

There is sometimes pressure from the consumer side where [someone’s] daughter says: “I don’t want Mom in skilled nursing. Please can you care for her here? We want her in this environment.” And we do everything we can in those situations if we feel comfortable that (a) regulatory-wise there isn’t an issue, and (b) we have the capability to provide the care and meet Mom’s needs.

But we don’t move anyone in that we cannot care for, and part of having this interdisciplinary team overseeing the communities is so we have a sales person and a nurse agreeing any time. If there is any disagreement at the community level over who is appropriate or not appropriate or anything else, there are experts that can weigh in on that and make sure that we make the right decision. That’s a key component as something that most companies don’t do.

But because we are so concerned that we are making the right decision on move-ins and move-outs on the other side and ensuring that we are making the correct decisions there, we have that discipline in place that actually reports up to the same three multidisciplinary team at a VP level. So we have significant oversight from different perspectives ensuring that we are striking the right balance.

[question]I understand this is a very large company. It’s home to tens of thousands of people. But do you think that sometimes the workers on the ground are making the wrong decision and moving in people or keeping people in your facilities who really shouldn’t be in them?[/question]

We are 27,000 human beings caring for 40,000 residents, and human beings make mistakes, there is no question, and we will make mistakes from time to time. And we do everything we can to put systems and oversight and protocols in place to try to minimize the chances of making mistakes or minimize the chance that a mistake will cause a negative outcome.

So it’s a fact of life, and it’s not peculiar to assisted living versus any other business, but from time to time human beings will make mistakes, and we are a people business caring for other people. That is, human capital is our greatest resource. It is what our business is all about. We devote as much time and attention to training and orienting and giving guidance and making sure that they feel comfortable in the decisions that they make, but on occasion there will be mistakes.

[question]… I know at Emeritus, in many facilities, there are bonus programs, there are various incentive programs for moving in residents. Do you ever think that these create incentives for employees to maybe bend the rules a little bit, to maybe make decisions that are not good about moving in residents?[/question]

I think we are very focused on the best interest of the resident, and [in] all the decisions that we make we want to make sure we are doing the right thing for the resident and their family. There are incentives in place, but that’s why some of the balances are in place as well.

We have got a director of community relations who may say, “I want to move in one more resident,” and we have a director of resident care that says: “That resident isn’t appropriate for us. We can’t make that move.” There is that balance.

There is an executive director there that can mediate those sorts of discussions, and I think I feel very comfortable that we have the right balances in place to ensure that we are putting the resident’s best interest first, and making sure that if they can live in our community and that’s their preference, we will make every arrangement we can to make that happen.

If we cannot care for them sufficiently, we will not jeopardize their health or their condition by keeping them in our community.

[question]… We have looked at the company’s regulatory history very closely in four different states: in Mississippi, Iowa, Georgia and California. And as we sifted through the state records, we found more than 100 cases in which residents didn’t get a proper medical evaluation or care plan, more than 70 cases in which inspectors cited the company for failing to properly train employees, and 57 instances in which inspectors said, hey, the company doesn’t have enough staff on hand to care for these people. As the CEO, when you hear about those kinds of things, how do you feel?[/question]

There are a lot of components to that regulatory process and the deficiencies. We welcome the process. We think that every state should have the regulations and the enforcement procedures in place to ensure that a standard is being met as they want to see care delivered in their state.

But in terms of the deficiency process, we would like for every community to be deficiency-free on every survey. Believe me, that is our goal. When we get deficiencies, though, we immediately address those. We view that as here is an outside set of eyes, they are looking at things with a different perspective. They are finding a gap or a mistake or a hole in the documentation or something that they are reviewing.

“We are 27,000 human beings caring for 40,000 residents, and human beings make mistakes, there is no question, and we will make mistakes from time to time. And we do everything we can to … minimize the chance that a mistake will cause a negative outcome.”

Many times deficiencies are somebody forgot to initial a line on a form, and that could show up the same as a deficiency that could actually put a resident’s well-being in jeopardy. Very different situations, and I think we take all of them very seriously. We focus on them.

I think if you look at our regulatory history versus others in the industry, we probably fair pretty well. I also note that our total number of deficiencies are declining. We are seeing a positive trend there because of all the focus that we’ve brought to that, and we are seeing our number of deficiency-free surveys increase. So we have got two positive trends we are seeing.

But it’s a part of the regulatory process. That is part of the interaction between state regulatory agencies and us as providers, and there will always be some of that back and forth in terms of their perspective.

Sometimes we don’t even agree. They may make a judgment or interpret a regulation in one fashion [and] we disagree. Sometimes there are mechanisms for appealing and having broader discussions in terms of that, and again, that’s all part of that regulatory process. So I feel comfortable knowing that we take it very seriously.

We want to make sure that we are doing everything we can to try to have deficiency-free surveys at every community, but I also recognize that that’s probably not realistic, that there is always going to be a few things that an outside evaluator can find if they dig into every system or paperwork or whatever that’s happening.

[question]As part of that review, we also found more than 50 cases where regulators said, hey, this is a resident in an Emeritus facility who shouldn’t be here. Either they shouldn’t have been moved in or they shouldn’t have continued to live here as their health deteriorated. Does that raise a concern for you?[/question]

Sometimes we will disagree with a determination that a regulator makes. Oftentimes we will appeal regulations or a deficiency related to that. Other times it may be that the state has taken a hard stance on a certain condition, that they have said, “We don’t want to see any residents with this certain condition residing in assisted living.” Sometimes even though we feel we can care for them, we say, OK, we’re going to have to comply with the state’s wishes on that, and we will make arrangements to move them safely into another environment that the state feels is more appropriate.

It’s interesting because even here in the state of Washington, we’ve had the situation, two different communities where on the one hand the state came in and said: “We think this resident is inappropriate for your level of care. You need to move them out.” And we had to go through the process with the family who is upset about it, but we made arrangements to move them.

In another situation we’ve gone to the state and said: “We don’t feel we can care for this resident anymore. We want to move them out.” And the state said: “No, you need to keep them. We feel you can care for them.” Even just in the same state, same regulations, there will be some of this subjectivity that is based on perspective and how we view our ability to care for residents and how a set of outside eyes as a state regulator views that.

[question]But some things are pretty cut and dried. In some states, if you have a particular condition, you can’t be in a facility. In some states, if you are posing an immediate harm to yourself or others, you can’t be in an assisted living facility. And so my question is, when regulators find those kind of cut-and-dried cases, the person’s got a legally prohibited condition and they are in an Emeritus facility, how does the company respond?[/question]

We absolutely would. If we’re made aware of the situation, that we agree with the regulator this is a prohibited condition, shouldn’t be here, we immediately would address that, work with the family, work with the physician, find them alternative placement that the whole team feels is appropriate.

[question]Because what are the risks of having somebody who has a prohibited condition, something that should keep them out of assisted living, in this kind of environment?[/question]

If we can’t adequately care for the resident, we shouldn’t have them. That’s the bottom line. I think in some respects, in some cases that even kind of trumps the regulation, because many times we’ve gone to the state regulatory agencies and asked for a waiver to keep a resident that otherwise shouldn’t be kept due to one of those conditions, and oftentimes are granted. They’ll say, OK, here you’re providing for the needs of this resident, yes there’s this thing in the regulation, but we’re going to give you a waiver because we feel the resident wants to be here, their family wants them to be here. We’re providing an appropriate level of care.

In most states now they allow hospice to come into our communities and provide end-of-life care for our residents. So if the resident doesn’t have an acute nursing need that needs the monitoring of nurses around the clock in a skilled nursing environment, they can stay with us through end of life with hospice nurses coming into our community and caring for them. And families by and large are so appreciative if we can provide that option for them.

[question]One thing that’s striking to us is the fact that the regulations in your industry vary so widely from state to state. Even the nomenclature varies from state to state. In some states they call this assisted living, in California it’s residential care facilities for the elderly. It’s a total mishmash across the country. How does that affect the way you do business?[/question]

I think the states are in [the] best position to determine how they want to structure regulations to care for their citizens, and there is allowing them to have the flexibility in terms of how they want that structure.

“If we can’t adequately care for the resident, we shouldn’t have them. That’s the bottom line.”

Some states have a single assisted living as a broad category license. Some have three or four different levels that all fall within assisted living, so it allows a flexibility I think on the part of the states to make some determinations.

And the thing that’s so different about assisted living versus skilled nursing is that it is very resident focused. It is about choice, and I just believe that choice is one of the biggest components to quality of life there is. [If] we start eliminating choice from the resident, we see a dramatic reduction in their overall quality of life. Assisted living has the flexibility to respect that choice to a much greater degree than skilled nursing.

So I think where you’re going with this is, should we be federally regulated?

[question] That’s my question. [/question]

And I’ll tell you, what would happen is the federal government would have to — by virtue of how they would have to approach it — they would have to approach it like they did skilled nursing and put everyone into the same box and say this is now the regulations. One size fits all. Everybody has got to do it this way. I think that eliminates choice to a huge degree.

[question]But for you as a CEO, you’ve got to deal with more than 40 different regulatory schemes. Isn’t that difficult for you to deal with all these different sets of rules from state to state?[/question]

It is to some degree and in some particular states, but by and large if we have policies and procedures and standards in place that we feel comfortable with, they meet all the state regulations. So state regulations may vary, but our standard is such that we’re above the minimum regulation of each of the states in most cases.

Now I say that and then I think there are some states that have some wacky regulations. So there we have to comply a little bit differently, and we create different residency agreements and different sets of forms for each state, and we do a lot of state-specific training.

It does create a situation where we need to focus on each state individually, but back to our premise that this is a local business. That’s kind of how we structure everything anyway. We focus on the local community in their local market with their local regulations, and that’s really how we’re structured as an organization, is we just are supporting those 475 individual businesses out there that are really doing the work of providing the care and service to our residents.

[question]One thing about the federal regulation of nursing homes is that it’s created this consumer interface called Nursing Home Compare that allows consumers to check out basically every nursing home in America and see what the quality levels there are. … There are many states where you really have trouble finding out what an assisted living facility’s history and track record are. Will there be an upside in your mind for consumers having more information about these facilities?[/question]

I think it’s going to get there. Already you go onto Google and there are the ratings, and you go to Yelp and there are the ratings. And I think because we are a private pay, more consumer-driven business than skilled nursing, which is primarily government funded, our customers are a big part of who’s evaluating us, and they’re going online now, and they’re increasingly going online.

And so I think what we’re going to see in assisted living is we’ll see more and more visibility that the states put up as technology improves and whatnot. That the states will put out there in terms of deficiencies and all of that.

But I think what probably drives the business even more is going to be this consumer feedback that is going to become more and more visible as time goes on.

[question]Would you support more states putting up inspection information about the assisted living industry?[/question]

I would. I think that one of the keys to our business is making sure that when a resident moves in, and their family is a big part of that process, that they understand what we can and can’t do. The more visibility they have in terms of what we do and how we do it and everything from state inspections, which we do post by the way in all of our communities so [the] consumer has access to review those.

[question]In the community but not online?[/question]

No, we don’t post them online, but some of the states do. But the more visibility that we have for the consumer and in terms of being able to make a good decision on what’s the right environment for them or their loved one, we’re all in favor of that. …

[question]And you track the violations across the company?[/question]

We do. We actually have our own central database that every incident that happens in a community we require that they fill out an incident report online, and that comes up into this database when we track and trend it.

If we notice that incidents are trending up in a particular community, or certain types of incidents are trending one way or another, we also have a team in place that follows up on incidents to make sure that they have been addressed and that interventions have been put in place to try to lessen the likelihood of a similar incident happening in the future.

It’s part of our — which again is a little bit different than most companies — we have this reporting go straight from the community to Seattle into this database, and then we push it back down through the regional teams to follow up.

In many companies, that reporting comes to the regional team, and if the regional team feels like they can deal with it, that’s as far as it ever gets, and we may not know about it at the corporate level. So we have reversed it and made sure that we have visibility on any incidents that happened in the community and that we have the ability to do the follow up and ensure that that they are being addressed appropriately.

[question]As you know, we have spent time with the family of George McAfee, who lived in your facility in Georgia, and Mr. McAfee died after he drank toxic dishwashing liquid that was in your facility. When we looked at the state inspection reports for California, we found nearly a dozen similar incidents where toxic chemicals were left out in places where seniors, often seniors with cognitive impairment, had access to them. Is that the kind of thing that you’re tracking with this system?[/question]

I can tell you that the incident with, the tragedy I should say, with Mr. McAfee was devastating for all of us, and it was a situation, it was human error. We had a staff member that failed to secure a locked cupboard. Mr. McAfee got access to this dishwashing liquid, drank it, and had absolutely tragic results. And our heart goes out to the family.

We did as a result of that situation survey all of our memory care communities throughout the country and install self-closing and self-locking cabinets to secure all of the potentially harmful chemicals. We went through extensive in-servicing to all of our employees.

[question]Training.[/question]

Training. Going back we increased the kind of comprehensiveness of our policies and procedures relating to the handling of chemicals. We took this extremely seriously and did everything we could think of from a proactive standpoint to make sure that [a] similar incident could not occur again.

Now that said, can an employee leave a chemical on the counter at some point? It’s possible. Can family members bring in a chemical and leave it with a resident? That’s possible. We absolutely feel that we have systems in place now to try to minimize the chance of a similar event ever occurring, and to my knowledge we haven’t had a similar event occur.

I’m not sure the timeframe of the deficiencies that you are referring to in California, but I don’t know of any other negative outcomes that have happened as a result of that. But I will tell you one thing for sure is that that has been of high focus, high priority for us because of this extremely tragic event that occurred in Georgia.

[question]We spoke to the family of Merle Fall. She died after apparently jumping out of the window of your facility outside Jackson, Miss. She had dementia. It doesn’t appear that she was trying to commit suicide. It appears like this was a product of her dementia from the state inspection, the records that are out there. How did your company respond to that incident?[/question]

Again, an incredibly tragic incident. Our heart goes out to the family. But staff was devastated as well that Ms. Fall was able to punch out the screen and squeeze through this 12-inch opening in the window.

Unlike Mr. McAfee, where we had a human error involved, that was one where we actually followed our policies and procedures and followed code, and it really was something that staff felt they had tried to anticipate everything they could.

They had checked all the windows in the community to make sure that none of them opened past 12 inches, which is the regulation in the state of Mississippi. And they had actually a caregiver had been with Ms. Fall five minutes before she ended up jumping out the window. So there was supervision. Our physical plan was in compliance.

In response to that, again, throughout the whole company, we now make sure windows have stops at eight inches instead of 12 inches, because it’s now the new standard for our company regardless of what the regulation is.

But it’s so difficult sometimes, particularly with our residents that may have some memory impairment, to predict their behavior. Sometimes their behavior is unpredictable and catch a staff off guard, even when they think they’re doing all the right things.

[question]Because since that incident, there was an incident in California at your facility in Oceanside that’s almost identical, where a gentleman in a second floor memory care unit pried open a window and got out onto a ledge and had to be coaxed back into this room by staff, and was at risk for falling out the window from the second floor. And that happened afterwards. How do you deal with this, and what does that say to us about what’s going on in these facilities?[/question]

Again, I think this is the vast exception to the rule. We are caring for 40,000 residents, 24/7, 365 days a year. Even going through and making sure that all of our windows stop block at eight inches, if someone has forgotten to re-inspect every quarter or every six months — and I’m not sure exactly what the protocol is at this point — to ensure that none of the locks have come lose or none of the residents have been able to jiggle open a lock or force open a lock.

But it is possible that in rare circumstances there could be a breakdown in the policies that we put in place and the physical steps we have taken to try to eliminate those risks. When you’re dealing with this many residents, particularly a population that can have unpredictable behavior, or is frail and is kind of a high-risk population to begin with, we will have situations from time to time. But they are the vast minority. It is really the exception to the rule. …

[question]… When we speak to experts about aging, a lot of them are telling us the population of people who are in assisted living now look a lot like the population of people who used to be in nursing homes. They are getting frailer, they’re getting more ill, and they have higher needs, and the regulation hasn’t kept up with that. What do you think of that analysis?[/question]

I think that every state is adjusting their regulations, and in response really to the consumer preference to keep their loved one in a more residential home-like setting that is the overwhelming consumer preference. That is what’s driving the growth of assisted living and the regulators are continually updating their regulations to try to be responsive to that on a state by state basis.

“Some of our residents and their families are willing to accept a certain level of risk in exchange for a quality of life that far supersedes the alternatives.”

One of the things we need to be careful of as a society is that we don’t start making the decision; [that] we don’t manage or regulate choice, resident choice, out of the equation. That we don’t start making the decision of what’s best for you.

I go and get a double [hamburger] with cheese and a shake and super scooper fries. I know it’s not good for me. My doctor tells me that. My wife, absolutely I don’t tell her, but it’s my choice and it feels good, and some of our residents and their families are willing to accept a certain level of risk in exchange for a quality of life that far supersedes the alternatives.

I think that is part of what’s driven the popularity of assisted living, and I fear if we went to a federally regulated, one-size-fits-all box, we would lose the flexibility to be able to continue to provide care in that environment.

[question]… If, say, there were regulations that required more training of caregivers across the board in assisted living, how would that affect the ability of consumers to choose an assisted living facility and choose an environment that they want to be in?[/question]

I think actually I would be in support of regulations that are focused on training, focused on experience and education and training in assisted living environment. I think that is helpful. It’s something that we have put a huge focus on in the last two or three years. Prior, much of the training happened at the local level within the communities without real consistent guidance at a companywide level.

Now we have launched an e-training platform, an online training platform. We have got hundreds of different modules [dealing] with all aspects of care and education regarding Alzheimer’s and dementia. Many of them are our own materials that we make available to employees, and many of them are more general, but that is to supplement the on-site, in-person training that we have put in place.

We have created a whole team to make sure that that training is consistent across our communities, and I’m in favor. The more we can educate our caregivers, the more we can educate our families as well in terms of what to expect and the service that we are delivering and the risks that still remain, I think the better we all are. I am absolutely in favor of anything that moves us in that direction.

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